With high, persistent levels of inflation it’s no surprise that interest rates have been rising for some time now. But what remains to be seen is “how high?” and “how long does this last?
Several months ago, I shared my insights on homebuying dynamics with Brian O’Connell from The Street, and in this blog, I’ve included my full thoughts on the topic.
What are we seeing happen to home prices?
Prices have been declining for a while now, but price declines are not even close to making up for the decrease in affordability resulting from rising interest rates. As a result, some transactions have begun to fall through where the buyer was not able to lock in their mortgage rate before it increased. In some cases, buyers are no longer able to afford the offer they made.
Should I buy a house while prices are falling, or should I wait?
Homebuying conditions are meaningfully more adverse for buyers than they were last year for anyone who intends to finance their purchase with a mortgage. Again, this is because home prices have not even come close to declining enough to make up for reduced affordability due to substantially higher mortgage rates. For those who intend to pay cash, their advantage over other buyers has gotten much stronger.
While the excesses of the housing market can be readily apparent, knowing when the market will turn will be hard to predict. Even though prices rose dramatically over a relatively short period of time, mortgage underwriting standards are much tighter than 2008, so people can largely afford the homes they've purchased.
Most likely, there will be many people who purchased within the last two years who can afford their mortgage but may be underwater for some time and unable to sell if they previously planned to. Long-time homeowners will still be able to sell whenever they want at a (reduced) profit, but recent homebuyers may not be able to list their homes if they have negative equity, which reduces inventory and therefore helps to support high prices.
What’s the “best” time to buy a house?
The best time to buy a house is when life dictates that you need one. It's a very challenging time to buy a home right now, so you need to update your financial plan to make sure that a purchase doesn't adversely affect your financial situation and lifestyle. For example, if a home purchase (on its own) pushed your retirement date several years later, or hindered your ability to help fund your child’s education, you need to understand what that means for you, and if that’s acceptable to you.
People currently looking to buy a home now decreasing prices but much higher mortgage interest costs than those that bought in the last two years. The upside of this is that interest rates may later fall, which would allow them to refinance while also boosting the value of their home. Most importantly, homebuying decisions should always be based upon affordability with your current income (not future), and based upon the mortgage rate you can get today. It’s certainly possible things could improve later on, but depending upon future changes (personal, or economic) that are beyond your full control is very risky and should be avoided.
Contact us if you’re considering a home purchase or sale and want to understand the full impact of this decision on your financial life.
Read the full article on The Street
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.